M&T Bank (MTB, Financial) is a regional powerhouse that has been on an interesting ride for the last few years.
The bank managed to survive the financial crisis without a single year of negative EPS and has grown its earnings substantially since the financial crisis ended. However, in the last few years M&T earnings have declined to below 2012 EPS.
M&T also sees its revenues consistently remaining flat. Like the rest of the banking sector, M&T has been struggling with the zero interest rate environment. On top of a lack of revenue growth, M&T entered into an agreement to merge with Hudson City Bancorp (HCBK, Financial) three years ago. Recently the merger was approved by the Federal Reserve and slated to close within a few weeks.
Hudson City merger
It's great to see the bank merger with Hudson City finally go through, but  the merger is not likely to lead to substantial revenue growth for the company. Over the next few quarters M&T will see its efficiency ratio rise substantially due to the expensive cost of a merger. Going forward, M&T will see its earnings take a hit due to higher operating expenses.
The bank is clearly chasing growth with its acquisition of Hudson City, but it comes at a great cost. M&T paid a premium for Hudson, and the cost of integrating with Hudson City will lay heavily on M&T.
M&T's third quarter results
M&T Bank in the third quarter saw revenues increase by 90bps; however, the company did miss analysts' estimates on EPS. Clearly the lack of revenue growth is taking its toll on M&T’s earnings. It is nearly impossible for M&T and other banks to see revenues in a zero interest rate environment.
M&T Bank did post an impressive $5.7 billion increase in average earnings asset, but that was offset by lower NIM losses during the third quarter. During the third quarter M&T saw NIM fall 9bps to 3.12%, compared to the third quarter last year. On the upside M&T NIM is still above an average level. The bank’s NIM is now falling at a more moderate pace.
Valuation
M&T Bank has a rich valuation compared to some of its larger competitors. This is in addition to the bank already trading for 1.9x tangible book value and 14x its projected next year EPS. M&T is selling for 11.3x its operating earnings and 16x its current earnings. These valuations are expensive for a bank that isn’t growing.
M&T is selling for a higher price-to-book value than some of its larger competitors like Wells Fargo (WFC, Financial) and JPMorgan Chase (JPM, Financial). Both Wells Fargo and JPMorgan are selling for 1.2x and 1.6x book value and growing revenues unlike M&T. When comparing the value offered by M&T with both Wells Fargo and JPMorgan, you come to the conclusion that M&T isn’t the best investment to make.
Risk
Investors who invest in M&T at the current market price are paying a massive premium for little to no growth. Sadly the bank is overvalued, and investors are at risk of losing their capital by investing in it. On top of being overvalued, the bank's recent acquisition will increase operating expenses, which will hurt earnings going forward, so investors should beware when investing in M&T, especially when there are far better places to put capital.
